The Federal Reserve reaction to the Great Recession was remarkably swift. In the months following the summer of 2008 not only did Bear Stearns, Lehman Brothers and AIG collapse but Freddie Mac and Fannie Mae were also taken under the government’s wing. In a working paper from Frederic Mishkin at the National Bureau of Economic Research, he puts it plainly, “The Federal Reserve’s modus operandi during the financial crisis can be characterized by saying that the Fed was engaged in massive experimentation in an unprecedented situation: That is, it was employing a large number of measures to contain the crisis, not knowing exactly which ones would work.” By now we know which ones worked, and it’s believed that — not just by Mishkin, but also researchers at the Bank of International Settlements, where Basel 3 reform is finalized — the actions of the Federal Reserve prevented things from getting much, much worse. And now things are shakily recovering, with numerous threats of a housing drag threatening to pull the economy back under. This afternoon, we find that the hard-talking Republicans are scaling back their efforts to wind down Fannie and Freddie. Efforts from everyone I speak to suggests a “solution” to the government-sponsored enterprises, whatever that may be, could be years away. Let me be clear. Fannie and Freddie were absent from the Dodd-Frank Act. Fine. But this should not be taken to mean there is time to spare when it comes to reforming the GSEs. One look at the state of the economy tells us otherwise. In an interview with Wilbur Ross, to be published in the January issue of HousingWire magazine, the billionaire investor summed it up. “There has to be an interim solution to Fannie and Freddie. There are those exposures, there are more losses coming as we sit here,” he said. “There’s a need to deal with that. There is not a need for a multiplicity of GSEs, when we can put them all into one.” Ross argues that consolidation of the GSEs would eliminate the duplicity of expenses in the two firms that ultimately rolls into losses for the taxpayer. And there is no reason to think this would take forever to do so. As Mishkin notes in the Fed-brokered swallowing of Bear Stearns by JPMorgan, the government took a huge chunk of toxic assets onto its balance sheet. Sound familiar? This happened in one famous weekend, which can be read moment by moment in Kate Kelly’s book Street Fighters. And when it was over, the Fed immediately turned its attention to Lehman, and brokered a deal with Barclays in a week. But while the Treasury Department, unlike with investment banks, maintained the authority to overtake Fannie and Freddie, there remains this strange sense of hand sitting and shoulder shrugging when it comes to doing something, anything, to patch the GSEs. The recovery is still well under way and will be for the New Year. But it appears an ill resolve to kick start the economy only to kick the GSE can further down the road. Jacob Gaffney is the editor of HousingWire. Follow him on Twitter @JacobGaffney. Write to him.

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